Causes of the Great Depression

Extracts from this document...

Introduction

Causes of the Great Depression Speculation in the 1920s caused many people to by stocks with loaned money and they used these stocks as collateral for buying more stocks. Broker's loans went from under $5 million in mid 1928 to $850 million in September of 1929. The stock market boom was very unsteady, because it was based on borrowed money and false optimism. When investors lost confidence, the stock market collapsed, taking them along with it. Short signed government economic policies were one of the factors that led to the Great Depression. Politicians believed that business was the key business of America. Thus, the government took no action against unwise investing. Congress passed high tariffs that protected American industries but hurt farmers and international trade. The economy was not stable. National wealth was not spread evenly. Instead, most money was in the hands of a few families who saved or invested rather than spent their money on American goods. Thus, supply was greater than demand. Some people profited, but others did not. Prices went up and Americans could not afford anything. Farmers and workers did not profit. Unevenness of prosperity made recovery difficult. Stock Market crash of 1929 Causes of the Great Depression Chapter 25: Dust Bowl, Scottsboro boys, Jacob Lawrence, Chicanos, Nisei, Middletown, soap operas, Frank Capra, Popular Front, Southern Tenant Farmers Union, James Agee, "The Ordeal of Herbert Hoover." 1. False Prosperity * overdependence on mass production, consumer spending, advertising, welfare capitalism, high tariff, "invisible hand" * automobile was the leading industry * chemicals, appliances, radio, aviation, chain stores * overproduction in textiles, farming, autos * real wages increased only 11% * 60% population less than $2000 poverty minimum * top 5% earned 33% income - spending by the rich essential * Andrew Mellon cut taxes 2. Speculation * Fed loaned at 3.5%, gold inflow 1927, Great Bull Market 1928 * broker loans on call rose from $3.5b in 1927 to $8.5b in 1929 * Goldman Sachs investment trusts, 50% margin trading at 5% interest * only 1.5m of 120m population were investors * pooling tactic of "anglers" - John J. ...read more.

Middle

More jobs were lost, more stores were closed, more banks went under, and more factories closed. Unemployment grew to five million in 1930, and up to thirteen million in 1932. The country spiraled quickly into catastrophe. The Great Depression had begun. Why was the Great Depression a disaster waiting to happen? While we have spoken about the 20's as a time of great prosperity, it was a tad deceptive. Problems lie under the surface that would not be dealt with by the conservative administrations of Harding, Coolidge and Hoover. The Great Depression did not begin in 1929 with the fall of the over inflated stock market. In fact the Depression began ten years earlier in Europe. As the depression raged on in Europe American's believed they would be immune to its effects. Isolationist sentiments and conservative doctrine held that the less we had to do with Europe the better. As a result American polices never addressed the possibility of the United States entering a depression as well. Actually American policies actually contributed to our entry into the depression. The early warning signs first came in the agricultural sector. Farmers continued to produce more and more food due to technological advances like the tractor. As production grew farm prices dropped. It was simply a matter of supply and demand. Framers reacted in the traditional manner and boosted production even further. Prices plummeted. Farmers began to default on their loans and the banks foreclosed. To make matters worse the central part of the nation was hit with a terrible drought. Farmers were devastated. The drought turned that portion of America into what was called "The Dustbowl." In the 1920's American economic policy was laissez faire. Businesses were left alone and for sometime things appeared to fine. American businesses reported record profits, production was at an all time high. The problem was that while earnings rose and the rich got richer, the working class received a disproportionally lower percentage of the wealth. ...read more.

Conclusion

The debtor nations put strong pressure on the United States in the 1920s to forgive the debts, or at least reduce them. The American government refused. Instead, US banks began making large loans to the nations of Europe. Thus debts (and reparations) were being paid only by augmenting old debts and piling up new ones. In the late 1920s, and particularly after the American economy began to weaken after 1929, the European nations found it much more difficult to borrow money from the United States. At the same time, high US tariffs were making it much more difficult for them to sell their goods in US markets. Without any source of revenues from foreign exchange with which to repay their loans, they began to default. The high tariff walls critically impeded the payment of war debts. As a result of high US tariffs, only a sort of cycle kept the reparations and war-debt payments going. During the 1920s the former allies paid the war-debt installments to the United States chiefly with funds obtained from German reparations payments, and Germany was able to make those payments only because of large private loans from the United States and Britain. Similarly, US investments abroad provided the dollars, which alone made it possible for foreign nations to buy US exports. By 1931 the world was reeling from the worst depression of all time, and the entire structure of reparations and war debts collapsed. In the scramble for liquidity that followed the Great Crash, funds flowed backed from Europe to America and Europe's fragile economies crumbled. Responses The Wall Street crash had ushered in a world-wide financial crisis. In the United States between 1929 and 1933 unemployment soared from approximately 3 percent of the workforce to 25 percent, while manufacturing output declined by one-third. Governments worldwide sought economic recovery by adopting restrictive autarkic policies (high tariffs, import quotas, and barter agreements) and by experimenting with new plans for their internal economies ...read more.

and World Bank. Private debt is money owed to international banks. This can be a major factor as the interest rates in official debt are less than private debt. More over there is another distinction because there is a clause within the IMF that states that the money must be used for projects within that country.

On top of this, a tax (octroi) is levied on the movement of goods from one district to another. This practice negatively impacts retail chains, as a higher proportion of their merchandise is sourced from outside the state of operation.

Debt Securities Issued Abroad: 2002 - 2004 (in millions of US$) Table 2.1 2.2 US High-Yield Corporate Bond Market The high-yield corporate bond market developed during the 1980s, in the United States and was a symbol of market growth, during that decade.

Customers nowadays rather go to a shopping centre where they can find everything they need under one roof. So, customers of Home Depot can find everything the need for their building, re-building etc. under the roof of a Home Depot store.

the local economy.8 This reduces the impact of the multiplier effect to boost the host nations economy. A multiplier effect occurs when money from businesses operations is invested in the local economy creating more employment, which will lead to people having more money to spend leading t an increase in demand.

In recent years, EU companies have invested considerably in China (new annual flows of utilised FDI of around USD 4.5 on average in the last 5 years), bringing up stocks of EU FDI to over USD 25 billion. The EU trade deficit mainly reflects the effect of market access obstacles in China.

Therefore successful companies have exhibited a strategy of dominating the market through acquisitions; shifting the industry market structure from monopolistic to oligopoly. No individual company claims 10% of the sector15. Acquisitions would reduce competition and supply cost efficient developments by acquiring resource-supply companies, which would lead to better market and product development.